Tax  

Warning sounded on £1000 tax grab

Warning sounded on £1000 tax grab

The government’s promise to not raise key tax rates but keep rates the same could cost earners more than £1,000 in extra tax, Hargreaves Lansdown has warned.

According to the investment platform, typical pay rises of 3.5 per cent — awarded to keep salaries in line with inflation — would push many earners over the income tax thresholds and boost the amount they pay in income tax.

This, coupled with taxes that are on their way up such as council tax, can cost an earner up to £1,013 extra this year, according to Hargreaves.

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Calculations from Hargreaves show a pay rise of 3.5 per cent would cost someone earning £12,500 about £88 more in income tax, while those earning £50,000 would pay £700 more after the same pay rise.

Under government plans councils will be able to raise council tax rates by 2 per cent (or 4 per cent if they have responsibility for social care). According to Hargreaves, the average council tax levy of £1,750 could increase by up to £70 per year under the new rules.

Although the rate of VAT and fuel and alcohol duties is not expected to change next year, Hargreaves argued the government would collect more of it as prices and spending rise.

For example in 2018/19 the VAT rate remained the same but the total VAT taken rose to £132bn — up 5.3 per cent from a year earlier. 

The average household is set to spend £6,236 on these taxes in 2019/20. Assuming a 5 per cent annual rise, they would spend £6,548 in 2020/21 — a rise of £312.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “You might have big plans for this year’s pay rise, but after the taxman’s finished with it, there’s a good chance you’ll get far less out of its tattered remains than you’d hoped.

“The government has promised not to raise key tax rates, but that’s not the full picture, because when it comes to tax, simply by keeping things the same, the taxman can take more of our cash. 

“So by holding income tax thresholds steady, more people will be pushed over them by pay rises.”

Ms Coles said although this does not mean an earner would be worse off overall, it could mean that the average take-home pay would “just about” keep up with inflation and any pay rise above this would go “straight to the taxman”.

Last month, a senior tax partner at RSM warned advisers about the tax changes they should watch out for in 2020.

imogen.tew@ft.com

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